Concentrated Stock? We’ve Got You Covered.

At Highland Private Wealth Management, we often see portfolios with a high concentration of stocks within a single sector, such as technology, or invested heavily in a single stock. Whether this concentration is the result of compensation structures, inheritance, or a history of successful stock picks, these investments often become a primary driver of wealth for high-net-worth individuals.

However, as the size of these concentrated holdings grows, so does the risk. With increased exposure to a single stock or a small group of stocks, volatility increases, which can jeopardize your long-term financial security. Market competition, regulatory changes, mismanagement, or geopolitical events often have a more severe impact on portfolios with less diversification. Some investors underestimate the risk in this situation and over-rely on future return potential, as their emotional connection to certain stocks can lead to a belief that they will continue to outperform. 

The reality is that a handful of stocks drive most of the overall stock market gains. Research shows that the median U.S. stock underperforms the broader market over its lifetime by 104.2%, while displaying 3.6 times greater volatility. And more than half of U.S. stocks have experienced catastrophic losses of 70% or more, often without recovering.

It can be difficult to know whether it’s best to continue holding these high-performing stocks in concentrated amounts, how to mitigate the effect of taxes if you decide to sell, and how to protect your portfolio for the long-run. If your portfolio is highly concentrated in a few stocks or a single industry, Highland is here to help.

Our team of Wealth Confidant advisors have a deep understanding of the challenges and opportunities this situation presents, and we offer a multi-pronged approach to addressing risk while considering your specific objectives. In addition to traditional methods like strategic stock sales or gifting, we use several tax-efficient solutions to reduce exposure and diversify your portfolio:

1. Direct Indexing:

Direct indexing allows for a gradual and tax-efficient reduction of concentrated stock positions through strategic tax-loss harvesting while building a more diverse portfolio of holdings. Over time, harvested losses can offset gains from stock sales in a systematic and efficient path toward portfolio diversification. The pace of executing this strategy can be adjusted around tax timelines, offering flexibility for different needs.

2. Exchange Funds:

Exchange funds offer an appealing option for immediate diversification without having to sell your stock (and incur taxes). This involves swapping concentrated shares for a stake in a diversified portfolio that tracks market indices, such as the S&P 500. Because it’s an exchange rather than a sale, this method of diversification allows you to defer taxes until the new shares are eventually sold. This strategy is highly effective but quite complex. To learn how exchange funds could benefit your portfolio, reach out to our advisory team at wealthconfidant@highlandprivate.com. 

3. Option Contracts:

Option contracts provide another avenue for managing risk without the immediate sale of stock. Depending on your goals, options can be structured to:

• Generate additional income
• Provide downside protection
• Adjust the risk/return profile to mimic broader market performance

Option strategies offer a customizable and liquid solution for reshaping your exposure while maintaining flexibility.

Tailored Strategies for Complex Needs

At Highland, we understand that managing a concentrated stock position involves more than just financial considerations—it includes tax implications, long-term goals, and emotional connections to the stock. We believe that your investment strategy should be aligned with what matters most to you, and our advisors work closely with each investor to develop thoughtful, personalized strategies that create confidence in the future.

To explore Highland’s approach to managing concentrated stock portfolios or to learn more about any of the strategies mentioned above, please contact us at wealthconfidant@highlandprivate.com and one of our Wealth Confidants will be in touch. We look forward to partnering with you on your financial journey.